As expected, the Committee voted unanimously in favour of maintaining both the Official Bank Rate and the stock of purchased assets steady at 0.5% and £375bn respectively. Since Carney’s speech at the Mansion House in the middle of June, the Bank of England will be the first ‘G7’ central bank to experiment a rate hike and the market is pricing it for early 2015 (February according to Reuters’ polls).
The minutes enhanced today the importance the ‘qualitative guidance’ and stated that even though the unemployment rate keeps decreasing at a faster pace than the Committee anticipated (currently at 6.5%, down from 7.6% in August 2013), the ’employment growth over the past year had been concentrated in lower-paid sectors’ which is problematic for the outlook of household spending. For instance, if we have a look at the Average Weakly Earnings (ex bonuses), British workers’ earnings grew by an annual 0.7% in the three months to May, its slowest rate on record.
STIRs and Cable:
If we look at the short-sterling interest rate futures (March15 contract), interest rate traded on LIFFE London, we can see that the implied rate (100-price) increased by 26bps to 1.17% in mid-June before edging back to lower levels (currently trading at 1.03%). The 2-year UK-US spread (see below in red), a popular Cable driver that the market watch since Carney introduced ‘forward guidance’ back in August 2013, peaked at 43.7bps in Mid June and is now trading 8bps lower at 36bps.
The rise in UK yields based on a hawish BoE tone raised interest for the British pound against the major currencies; short EUR/GBP (monetary policy divergence) and long GBP/USD (based on a macro perspective and BoE being more ‘active’) have been popular trade to hold.
However, Cable has been trending lower for the past couple of weeks and hasn’t managed to break the 1.7200 level last week with the Fed making a move also on its rate policy (Yellen’s Testimony, see article Markets after Yellen). The pair is trading at 1.7050 at the moment and seems on its way to re-test the 1.7000 – 1.7020 area in the short term. Some bids are seen in this area, however we would suggest waiting for 1.6960 – 1.6970 for a buying-on-dips opportunity.
Figures to watch this week:
Tomorrow (July 24): UK Retail Sales, expected to increase by 0.3% MoM in June
Friday (July 25): First Q2 GDP estimate, expected to grow by 0.8% QoQ